In the historic past, precious metals circulated as currency. The metals circulated mainly in the form of coins, and over time improvements were made to coins to improve their reliability. These improvements included, for example, detailed engraving on the face and obverse of the coin, and milling of edges. These improvements were intended to prevent the clipping of coins, which was a process that lightened the weight of the coin. When this practice occurred, the coin was debased, i.e., it lost purchasing power because the coin no longer constituted the weight of gold it was purported to constitute. Each debasement interfered with normal trade and commerce, and these interferences impeded economic activity in general. Subsequently, debasement of coin became subtler, and frequently included substitution of a base metal for the gold.
The circulation of precious metals coins was in time supplanted by certificates during the period from 1680–1840. By this method of currency, the coins of precious metal remained in safe and secure storage, typically a vault facility maintained by a bank or warehouse company. A certificate of deposit, a paper document, was issued by the bank or warehouse company and evidenced the deposit of coin that had been made into the facility, and the certificate of deposit began circulating as a substitute for the coin. Circulation of the certificate, in lieu of the coins, offered numerous advantages. Paper was easier to transport, and a relatively small amount of certificates could be used to complete transactions of high value. There was less risk of debasement of the coin that was stored. However, while these advantages significantly improved the circulating medium, there were also disadvantages. These include forgery of paper certificates, fraud and bankruptcy of the bank or warehouse company.
As a result, another improvement to currency soon emerged. This improvement in the nature of currency was the creation of deposit currency. Deposit currency is a process that enables paper money and/or coin to circulate as currency. By this method of currency, the coins of precious metal and/or the paper currency that represented a claim to those coins, remained in safe and secure storage, typically a vault facility maintained by a bank. Circa 1840 to the present, the circulation of coin and paper money for commercial transaction was supplanted by deposit currency, i.e., money is now moved around mainly by checks and wire transfers.
The creation of deposit currency significantly improved the circulating medium. It was no longer necessary to extensively rely on coins, which could be clipped, debased, etc., nor on paper money, which could be counterfeited. By moving monetary units of account on deposit in one bank to another bank, the process of payments was significantly enhanced.
However, in time unforeseen problems have appeared which detract from the use of deposit currency as a medium of exchange. The institutions in which clients lodge their money and deposit currency sometimes are unable to meet their commitment to their clients to return the clients' coin or paper money. The institutions, typically banks, which accept the deposits of coin and paper money from their client, loan the coin and paper money to other clients. Occasionally these borrowers failed to repay their loans, causing the bank to take a loss. Cumulatively these losses can be large enough to cause the bank to fail. A bank in that case no longer has sufficient coin or paper money to repay its liabilities to its clients.
Because bank failures have caused great harm, much effort has been expended to prevent bank failures where possible and to limit the adverse impact on economic activity should a bank fail. For example, government programs have been implemented to insure depositors that their money will be returned, or that they will otherwise still be able to have access to the value of their deposit currency. The deposit insurance programs are limited to some maximum amount, preferably $100,000, so bank clients with deposits greater than the insured amount are at risk for the amount of their deposit currency above the insured limit.
A particular problem is the payment risk now inherent in existing payment mechanisms, and the problem of “float.” Payment risk arises in conventional banking systems where a financial institution accepts deposits, then in turn loans out that money to others. This is known as “fractional banking,” in that the financial institution only keeps on hand a fraction of the actual assets it is holding for the account of its depositors. If the financial institution fails due to bad loans or fraud, the financial institution lacks sufficient assets to pay off its depositors. This practice has lead to significant losses in connection with financial institution failures such as the Herstatt Bank in Germany and the BCCI scandal. A related payment rise arises due to the fluctuating value of national currencies due to inflation and currency exchange rate variations dependent on the economy of the nation issuing the currency. Thus, there is a risk incurred by accepting national currencies.
“Float” is the amount of time a payment must wait for a transaction to be processed. This is considered an expense because of the unavailability of funds, which represents opportunity costs. In order to eliminate these payment risks and float, my invention uses an asset (like gold) instead of a liability (national currency) for settling payments.
Recent advances in the field of cryptography have made possible the secure and privacy-protected transfer of digital information over insecure, open communication channel such as the global computer network known as the “Internet”, by using public key encryption technologies.
Public key encryption methods have been developed for use in electronic cash. In one such method known as the RSA algorithm, encryption and decryption are accomplished by two mathematical equations which are related as inverses of each other. These equations are the private key, used by the issuing financial institution to digitally sign, or certify, a note, and the related public key, used by the recipient to determine and verify the existence of a valid signature on the note. Such protocols are known in the art and are described for example in Chaum, U.S. Pat. No. 4,759,063, and disclosure of which is hereby incorporated by reference.
In addition to such digital signature methods for certifying a digital note, a blind signature protocol has been developed so that the certifying financial institution cannot determine the note which it has certified, allowing the user to maintain his privacy. In such systems the user “binds” the note he submits to the financial institution for its digital signature, the financial institution applies its digital signature to certify the note, and the user then unblinds the note and uses it to make a payment to a payee. A blind signature system is described in Chaum, U.S. Pat. No. 4,759,063 which has been incorporated by reference, and is in commercial use by DigiCash b.v. of the Netherlands.
In order to prevent a user from spending the note more than once, methods have been developed for testing the note to determine if it has already been spent. In one such system, if a note is spent twice, the identity of the user is revealed. Such a system is more suitable for lower value payments and is disclosed for example in Chaum, U.S. Pat. No. 4,914,698. For higher value payments, the payee will verify the status of the received note with the issuing financial institution, which will keep a database of issued and spent notes.
In still other methods, notes may be generated that can have plural currency values (like a wallet containing $10, $5, and $1 bills) or which can have a variable value as portions of the note are spent. Such methods are disclosed in Chaum, U.S. Pat. No. 4,949,380, which is hereby incorporated by reference.
In summary, such public key signature systems allow an issuing financial institution to digitally sign an electronic note with its secret key such that the user, and the ultimate payee, can verify the authenticity of the note and the ability to make payment. The blinding protocol protects the user's privacy by preventing the financial institution from tracing a note subsequently presented to it for payment as cash.
In such systems, the electronic note signed by the issuing financial institution is denominated in a national currency. In my prior copending application Ser. No. 08/465,430, now issued as U.S. Pat. No. 5,671,364, which is hereby incorporated by reference, I have described the problems associated with payment systems based on national currencies and the problems associated with common banking practices.